What to look for in Netflix’s earnings

Things to keep an eye on when Netflix reports 2015 third-quarter earnings.

By

TreyWilliams

Reporter

Netflix Inc. has a lot on its plate.

The streaming giant
NFLX, -2.29%
is pushing further into the content space, competing for content with rivals such as Amazon.com Inc.’s Instant Video and Hulu, a joint venture of Walt Disney Co.’s
DIS, -0.80%
ABC, Comcast Corp.’s
CMCSA, -2.35%
NBCUniversal and 21st Century Fox Inc.’s
FOXA, -2.29%
network, while also encroaching more on traditional media and film companies.

To boot, Netflix continues to advance its 200-country expansion plan by the end of 2016. Netflix has expensive goals. The company is scheduled to report third-quarter earnings after the bell on Wednesday.

Earnings: Netflix is expected to report per-share earnings of 7 cents, according to analysts surveyed by FactSet. The company executed a 7-for-1 stock split last quarter, during which it posted EPS of 6 cents, beating the FactSet consensus of 4 cents. Netflix has only missed on EPS in two of the past 10 quarters, according to data gathered by FactSet. The Los Gatos, Calif.-company missed FactSet consensus on EPS during the first quarter due to its expansion into new markets. Last quarter, profit fell 63% as costs to buy and create content increased and a strong U.S. dollar decreased the value of revenue garnered outside of the U.S.

Revenue: The 32 analysts tracked by FactSet expect Netflix to report $1.75 billion in revenue, which breaks down to $1.07 billion in domestic streaming revenue, $523 million in international streaming and $157 million from domestic DVD revenue. Revenue of $1.75 billion would be a nearly 6% increase from last quarter when Netflix reported $1.64 billion, missing the FactSet consensus, and a 19% bump from 2014’s third quarter. Netflix has missed consensus on revenue in four of the last 10 quarters.

Share price: Netflix shares have more than doubled in the year to date, up more than 132%, outperforming the S&P, which is down 2% in the year. Analysts covering the stock on FactSet have an average price target of $117.76, with an overweight rating.

Other issues: Netflix has recognized that competition will continue to stiffen.

“We strive to win more of our members’ ‘moments of truth.’ Those decision points are, say, at 7:15 p.m. when a member wants to relax, enjoy a shared experience with friends and family, or is bored. The member could choose Netflix, or a multitude of other options,” the company wrote in long-term view for investors.

The competition among Amazon, Hulu and Netflix for original and exclusive content has ramped up in recent months, with a looming Apple Inc.
AAPL, -1.92%
entrance as well. Netflix, which has harped on the importance of such content, plans to spend more than $6 billion next year as it looks to expand its library. To help facilitate its need for new content, Netflix increased the price of its standard service to $9.99 from $8.99 for new subscribers in North America and Latin America.

Analysts at Goldman Sachs wrote that Netflix’s ability to price below other over-the-top services—those that don’t require a cable subscription—is a major competitive advantage that it has to maintain, given the unit economics of a more owned content business.

Some analysts hold the belief that the price increase could hurt Netflix’s future subscriber growth. It’s widely believed that third-quarter subscriber numbers will show continued growth and exceed the FactSet consensus of 3.56 million net adds.

“Bears will argue that the price increase elevates risk around new sub growth in the key 4Q and 1Q quarters,” Raymond James analyst Justin Patterson wrote in a note. “Netflix has had three consecutive quarters of strong U.S. net additions [since missing its guidance following a price increase in 2014 3Q], suggesting that the 3Q14 miss was more due to seasonality than pricing. As such, we believe risk of a material deceleration in new users is low.”

Wedbush analyst Michael Pachter said in a note that the price increase and competition reflect chinks in Netflix’s armor. Pachter is bearish on Netflix, with a $40 price target and an underperform rating on the stock.

“We believe that the increase reflects increasing content cost rather than pricing power,” Pachter wrote. “The $1 increase is unlikely to trigger significant customer attrition, but it is insufficient to take Netflix to the high level of future profitability that its valuation implies.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.